Inflation to soften in 2 months following RBI action: Montek

The Planning Commission today said inflation will moderate in the next two months following the Reserve Bank of India's (RBI) decision to hike key policy rates by 25 basis points each last week.

"RBI has to look at the price trend, underlying momentum...And what else is happening in the economy before making up its mind," Planning Commission Deputy Chairman Montek Singh Ahluwalia said, commenting on the decision of the central bank to check rising prices by raising rates.

Besides monetary action, the declining trend in food prices in the backdrop of a good rabi (winter) crop, he said, "Will bring down overall inflation in the next two months."

The RBI's decision to raise repo and reverse repo (short-term lending and borrowing) rates by 25 basis points each to 5 per cent and 3.5 per cent, respectively, on Friday evening was aimed at anchoring price rise.

Inflation soared to 9.89 per cent in February exceeding RBI's March-end projection of 8.5 per cent and is expected to enter double digits soon.

The RBI's decision, Ahluwalia further said, "also signals a return to a normal situation from an excessively relaxed position."

Following the collapse of the global economy in September 2008, the RBI lowered key policy rates and ratios to pump in liquidity to help the cash-starved industry.

With the economy showing signs of recovery, the RBI has started gradual withdrawal of the monetary stimulus it provided to the industry during the economic downturn.

The central bank is scheduled to announce the annual credit policy on April 20, during which more monetary action could be taken to deal with the price situation.